DBAS Financial Management QP E0318
ANSWER ALL QUESTIONS (25 MARKS EACH)
Write your answers in the answer booklet provided, starting your answer to each question on a new page. Number your answers according to the question number, and also enter these numbers on the frontpage of the answer booklet.
1. New-worn Pte Ltd, a textile recycling firm, has been in business for 20 years. It is contemplating purchasing new machines to replace existing ones. In order to determine the feasibility of incorporating the new machines into its current production process, New-worn had previously paid $6000 to commission a study for this exercise.
The new machines are expected to cost $340 000, with an additional $10 000 for installation expense. The after-tax proceeds from disposing off existing machines is expected to amount to $45 000. Current assets will increase by $5000, and current liabilities will increase by $3000.
The revenues and expenses (excluding depreciation and interest) associated with the existing machines for the next four years are given in the table below.
|
Year
|
1
|
2
|
3
|
4
|
|
Revenue ($)
|
500 000
|
620 000
|
680 000
|
720 000
|
|
Expenses ($)
|
380 000
|
520 000
|
600 000
|
650 000
|
The company has a cost of capital of 8% per annum.
a) Determine the initial investment associated with the purchase of the new machines. (4 marks)
b) It is projected that the new machines will increase revenue by 25%, and increases expenses by 10% respectively. Calculate the following:
i. Operating cash inflows for the existing machines. (4 marks)
ii. Operating cash inflows for the new machines. (4 marks)
iii. Incremental cash flows for this project. (4 marks)
c) Calculate the Net Present Value (NPV) for this project. (7 marks)
d) Should New-worn purchase the new machines, or continue with the existing machines? Explain. (2 marks)
2. a) Drex Ltd has a $100 face value bond with a 4.5% coupon rate.
The bond matures in 25 years, and coupons are paid annually. The required rate of return is 6%.
(i) Calculate the value of the bond. (6 marks)
(ii) Is the bond priced at a discount, par or premium?
Explain. (2 marks)
(iii) List three features that Drex Ltd could attach to this bond issue. (3 marks)
c) CuJi Inc just paid a $2.50(D0) annual dividend per share. Investors believe
that the dividend is expected to grow at a rate (g) of 2% per annum for the foreseeable future. Assume investors require a rate of return of 5%.
(i) Calculate the current price of the stock. (3 marks)
(ii) If the stock currently trades at $86, would you buy it? (1 mark)
c) TESB Corporation has the following capital structure.
|
Debt
|
Before-tax cost of debt 4%. Corporate tax rate 40%.
|
|
Preferred Stock
|
6% at par value $20 per share
and Floatation cost $4 per share
|
|
Common Stock
|
Current price $22 per share
Dividend next period (D1) $1.50 per share. Growth rate (g) of
dividend 3%
|
Giving your answers in percentages to 2 decimal places, calculate the
(i) Cost of debt. (2 marks)
(ii) Cost of preferred stock. (2 marks)
(iii) Cost of common stock. (2 marks)
(iv) Weighted average cost of capital, using the following capital structure.
|
Source of Capital
|
Long term Debt
|
Preferred Stock
|
Common Stock
|
|
Weights
|
20%
|
10%
|
70%
|
(4 marks)
3. P-Generator is a manufacturer of industrial portable power generators. The
finance manager is concerned about the firm’s management of working capital.
a) The average collection period and average payment period are 28 days and
32 days respectively. The firm turns over its inventory 10 times each year (assume 365 days year), and currently has annual sales of $30 million.
(i) Calculate the firm’s operating cycle and cash conversion cycle, correct to 1 decimal place. (5 marks)
(ii) Determine the amount of resources needed to support the firm’s cash conversion cycle. (4 marks)
b) P-Generator purchases 80 000 units per year of a component used in power generators production. The cost per order is $40, while the carry cost is $8 per unit per year.
(i) Calculate the economic order quantity. (4 marks)
(ii) Using your answer in (i), calculate the ordering cost, carrying cost and total inventory cost. (8 marks)
c) Suppose P-Generator operates a 250 days per year, and maintains a
minimum inventory level of 150 units of safety stock. If the lead time to receive orders ofthe component is 5 days, calculate the reorder point. (4 marks)
4. a) Describe the FIVE steps in planning personal financial affairs. (10 marks)
b) “Apart from your own actions, the outcome of your financial plans also
depended on external factors”. List THREE of such external factors. (6 marks)
c) The following is an extract of Danny Ong’s personal balance sheet.
|
Assets
|
|
|
Liquid Assets
|
$
|
|
Cash
|
1 000
|
|
Savings Deposits
|
6 000
|
|
|
|
|
Investments
|
$
|
|
Bonds
|
10 000
|
|
Insurance
|
80 000
|
|
CPF Savings
|
128 000
|
|
|
|
|
Real Properties
|
$
|
|
HDB apartment
|
420 000
|
|
|
|
|
Personal Properties
|
$
|
|
Club Membership
|
40 000
|
|
Car
|
105 000
|
|
|
|
|
Liabilities
|
|
|
Current Liabilities
|
$
|
|
Credit Cards
|
3 400
|
|
Tax Payable
|
1 200
|
|
|
|
|
Long Term Liabilities
|
$
|
|
Mortgage Loans
|
260 000
|
|
Vehicle Hire Purchase
|
65 000
|
(i) Calculate Danny’s net worth. (3 marks)
(ii) Determine Danny’s Solvency, Liquidity and Gearing ratios (6 marks)